After a relatively slow start, China has made rapid strides in migrating to cloud computing and now has the world’s second-largest market after the United States. China’s public cloud is expected to more than double in size in the next few years, from $32 billion in 2021 to $90 billion by 2025.1
To date, China’s cloud adoption has been led largely by consumer-facing companies, which need elastic, on-demand access to unlimited computing power to help them respond to huge fluctuations in customer demand. During China’s Singles’ Day shopping festival, for instance, e-commerce traffic, transactions, and gross merchandise volumes can reach up to 30 times normal daily levels. Popular live-commerce shows with real-time purchasing and audience interaction also make enormous demands on computer infrastructure. The streaming room of top influencers can have up to 100 million views and over $1 billion in presales in a single day.
Consumer-driven growth will remain an important driver of cloud adoption, but we believe the next wave of migration could be spearheaded by China’s critical industrial and manufacturing sectors. To better understand the developing cloud landscape in China, we surveyed 278 decision makers in enterprise IT, digital, and cloud from a wide range of sectors, and derived insights about where business value is likely to be created in the next few years (see sidebar, “About the research”).
Private cloud remains prominent in China’s hybrid and multicloud future
Over the next few years, the pace of China’s cloud migration will be broadly in step with the rest of the world’s, with a 19-percentage-point increase expected in IT workloads shifting to cloud between 2021 and 2025. But China differs from other countries in its high proportion of private cloud, which is expected to reach 42 percent by 2025, compared with 36 percent for public cloud.1
Only 11 percent of the companies in our survey intend to be mostly on public cloud. The remainder will continue to combine private cloud with traditional servers or use hybrid cloud, and 49 percent intend to become cloud native. Demand for private-cloud customization is very high in China, constraining scalability and profitability. Our analysis suggests that companies typically choose private cloud because they doubt their ability to configure public cloud securely, operate in a regulated sector such as financial services, or prefer to keep data in house.
Most Chinese enterprises are not keen on recurring-cost models for enterprise IT and software spending, preferring instead to make one-off or up-front payments to capitalize IT and software costs (and use up any remaining annual IT budget). As a result, cloud service providers (CSPs) seeking growth in China will need a strong value proposition in private as well as public cloud and the ability to support enterprises in managing a hybrid cloud infrastructure. They will also face the challenge of finding a scalable economics model and managing short- to medium-term economics that are likely to be less attractive than in developed markets.
When enterprises are selecting CSPs, just 19 percent intend to use a single provider, while 76 percent intend to partner with multiple CSPs. Only 5 percent believe they can build cloud themselves without external help.
The two most important sectors economically lag in cloud adoption
While sectors with numerous tech-savvy and digital-native companies, such as e-commerce and education, have shifted a significant portion of their IT workloads to the cloud, others have not—notably, the labor-intensive industrial and manufacturing sectors that contribute more than a quarter of China’s GDP. But that could quickly change given the latest national policy guidance.
In its 14th five-year plan for 2021–25, China seeks to transform the industrial and manufacturing sectors by boosting digitization and productivity to offset rising labor costs and slowing population growth.1 The plan calls for the adoption of industrial internet-platform applications to triple from 15 to 45 percent, and the digitization of management and operations to increase from 55 to 68 percent in product research and development (R&D), manufacturing execution, internal operations, maintenance services, and similar processes. As a result, the industrial sector is poised for transformation, with 32 percent of local IT workloads expected to migrate to (mostly private) cloud by 2025. Travel, transport, and logistics is expected to see the next-highest shift to cloud, at 26 percent.
Business growth is the biggest reason for migration
Our survey found that the three most important reasons for migrating to cloud were the need to scale fast to support business growth (cited by 60 percent of executives as one of their top two reasons), the need to increase IT efficiency (43 percent), and the need for high availability and resiliency (36 percent).
Notably, only 17 percent of executives said their main reason for migrating was to gain access to software as a service (SaaS). This is understandable given the size of China’s SaaS market, which was worth just $5.2 billion in 2020, a tiny fraction of the $120 billion US market. The broad adoption of SaaS applications and tools would unlock enormous opportunities for innovation and value creation, but it would require a fundamental shift in Chinese companies’ willingness to pay for software.
The biggest barrier to migration is the perceived difficulty and cost
When asked to identify their top two concerns about cloud adoption, 94 percent of survey respondents cited the cost and difficulty of migration, security, and regulatory compliance. By contrast, only 16 percent were concerned about the lack of a compelling business case.
This suggests enterprises have yet to fully appreciate cloud’s ability to improve efficiency, boost productivity, and capture business value. Clear messages about how revenues and margins can be enhanced by adopting cloud could help CSPs and technology providers convince businesses to make the shift.
Cloud leaders have more than 70 percent of their IT workloads on the cloud
Clear differences in cloud adoption have emerged between companies:
— Leaders had more than 70 percent of their IT workloads on the cloud in 2021 and expect to reach 90 percent by 2025. We subdivided them into two segments: Public-cloud leaders (16 percent of the survey sample) are typically consumer-facing enterprises that look to their CSPs mainly for technical performance and support with key accounts. Private-cloud leaders (21 percent of the sample) are typically state-owned enterprises, financial and real estate firms, or traditional manufacturing and industrial companies; they favor private-cloud and hybrid solutions because of security, regulatory, or data-compliance constraints or latency requirements,1 and are therefore unlikely to move to public cloud.
— Followers (34 percent of the sample) had between 50 and 70 percent of their IT workloads hosted on the cloud in 2021, with a roughly even split between public and private cloud. Most followers are multinational corporations or relatively price-sensitive businesses. They are starting to accelerate their cloud migrations, but many are struggling with the shift to a new cloud operating model.
— Laggards (29 percent of the sample) had only 31 percent of their IT workloads on the cloud—less than half the share for leaders—in 2021. On average, two-thirds of their workloads are still hosted on traditional servers, typically because they began their digital transformation late and lack clear road maps and business support for cloud. Their share of IT workloads on the cloud is expected to rise sharply, to 60 percent by 2025, but they will still lag well behind leaders’ 90 percent. It’s worth noting that the largest relative increase in cloud adoption in the next three years is expected to come from laggards (up by 29 percentage points) and followers (20 percentage points).
In terms of public-cloud adoption, there is an enormous gap between laggards, with only 13 percent of their IT workloads on the public cloud in 2021, and public-cloud leaders, with 58 percent. This gap should persist to 2025, when the share of IT workloads on the public cloud is projected to be 72 percent for public-cloud leaders but only 24 percent for laggards.
Internal business-facing functions have the greatest gaps in cloud adoption
The aggregate numbers for China’s cloud-based IT workloads—roughly 60 percent in 2021, rising to 78 percent in 2025—mask wide variations in adoption rates between different functions and between leaders and laggards within functions. Consumer-facing functions, such as marketing and sales and service operations, have the highest average adoption rates, at 69 percent and 64 percent, respectively, while more internal functions, such as logistics, manufacturing, and risk, have the lowest. One of the largest gaps within a function is in strategy and corporate finance, where leaders average 47 percent adoption and laggards just 11 percent.
We broke these nine functions into 40 “domains,” or groups of business use cases, and found that the average cloud adoption rate in each domain varied enormously, from less than 5 percent to 60 percent. We then broke these 40 domains down across 12 industry sectors and found that the average adoption rate by domain and industry was less than 25 percent. This further demonstrates that Chinese companies still have enormous opportunities to develop, adopt, and scale use cases that have a direct impact on revenues and margins.
Examples of promising domains with low adoption rates include:
— Marketing and sales: customer-retention management, pricing and promotions, personalization, omnichannel fulfillment
— Service operations: contact-center automation, chatbots, asset tracking and maintenance
— Product development: process design R&D
— Supply chain: sales and parts forecasting, store operations, inventory and parts optimization, procurement, spend analytics
— Manufacturing: digital twins and 3-D modeling simulations, yield and throughput optimization, predictive maintenance
— Human resources: performance management, optimization of workforce deployment, sales force execution
Key industry-specific use cases with direct business impact offer the greatest potential for cloud pull-through
The opportunities to improve revenue or EBITDA through industry-specific use cases will be the most powerful factor in persuading lagging sectors and businesses to adopt cloud. Our experience is that cloud adoption alone is not enough to unlock business value. Instead, enterprises need to reimagine how business models and processes can be improved through applications and solutions that take advantage of cloud. These use cases are likely to be developed and implemented through partnerships between CSPs, technology providers, and the enterprises themselves.
One example is the digital twins1 used to simulate, test, and validate new manufacturing processes before they are put into full-scale production. By using digital twins, a supplier of machinery, robotics, or automated systems can typically reduce R&D costs by 5 to 10 percent in product manufacturing and 40 to 50 percent in process design. Yet only about a fifth of the manufacturing and automotive companies in our survey—and none of the industrial companies—had adopted digital twins or other forms of cloud-based simulation in product development.
Top Chinese CSPs lead the market, but global CSPs still have substantial value pools to address
In our survey, 70 percent of respondents expressed a strong preference for Chinese cloud service providers. That leaves 30 percent of the market that could be realistically addressed by global CSPs, comprising the 10 percent of companies that strongly prefer global CSPs plus the 20 percent that are open to CSPs from any region.
When assessing CSPs, the top three buying factors for Chinese enterprises are cybersecurity and data compliance, performance and technical requirements, and key account and operations support. Other significant factors include domain-specific solutions and value for money. The leading Chinese CSPs are perceived to be at least twice as strong as other competitors across almost all key buying factors.
Although global CSPs are not the preferred choice for most Chinese companies, roughly 30 percent of companies are open to using global providers, which translates into a total addressable cloud market of $30 billion to $70 billion by 2025. Our survey indicates that public cloud could account for 45 percent of this total addressable market, similar in size to the entire public-cloud market in Germany—the fifth largest in the world at $25 billion.
What enterprises and CSPs can do to accelerate cloud journeys
Businesses wanting to accelerate their shift to cloud and capture some of the more than $1 trillion of value at stake need to ensure that they take the right approach and put key enablers in place. Following are some of the most important steps:
- Target investments at business domains where cloud can enable revenue and margin improvements. In our experience, carefully selecting applications within a specific domain to move to the cloud and sequencing these moves thoughtfully delivers far more business benefit than a wholesale “lift and shift” approach aimed at cutting IT costs. Applications should be aligned to specific business cases and quantifiable business value so they can be prioritized and tracked.
- Set up a governance model that facilitates collaboration between IT and the business. To manage the strategy and governance of their cloud migration, successful companies create a business-execution office comprising business, finance, and technology leaders, who are jointly responsible for delivering the migration and defining business value, key performance indicators (KPIs), migration paths, economic models, and prioritization criteria. The business-execution office is often supplemented by a cloud center of excellence made up of engineers, architects, and product designers. Their role is to design the foundational reference architecture, translate migration scenarios into deployable archetypes, integrate modern ways of working into a cloud-native operating model, facilitate rapid adoption across the business, and champion site-reliability engineering to optimize the cloud’s operational efficiency.
- Build a cloud-native operating model to unify and standardize infrastructure management and technology delivery. To prevent legacy IT processes, manual interventions, and multiple handoffs from impairing migration speed and quality, successful companies redesign the entire technology-delivery process. They reengineer every step—from architecture design and infrastructure-resource provisioning, through application development, testing, and deployment, to production, monitoring, and incident handling. They also ensure that the new processes are highly automated and have extensive self-service functionalities to provide a seamless developer experience.
For their part, global CSPs seeking success in the Chinese market could target sectors where they can bring global best practices to bear and offer a suite of technology solutions to accelerate business value creation. They could help clients to define their cloud target state, focus on how to create value, plan a clear migration route with separate paths for legacy and modern applications, manage a hybrid model during the transition, and support private- and public-cloud operations thereafter. Along with local CSPs, system integrators, ecosystem technology providers, and coaching and change-management firms, they will also participate in cloud ecosystems to build technology solutions that improve outcomes for Chinese businesses.
China’s cloud migration is now entering its second wave. Adoption in the next few years will be driven by the introduction of an array of industry-specific solutions to improve business performance.
